KARACHI, Dec 17: Money supply grew by 8.06 per cent in the first five months of the current fiscal year against the full year target of 11.06 per cent. Sources close to the State Bank say this may compel the central bank to review its expansionary monetary policy stance next month.

According to the latest figures released by the State Bank, the monetary assets (M2) grew 8.06 per cent to Rs167.554 billion between July-November 2003. The target set for M2 growth during the fiscal year 2003-04 is Rs230 billion.

But unlike in the previous fiscal year when 97 per cent of M2 growth had its roots in net foreign assets — this year it is the net domestic assets of the banking system that has pushed up M2.

The net domestic assets (NDA) of the banking system expanded by Rs108.365 billion in the first five months to November 2003, surpassing the full fiscal year target of Rs100 billion. And the net foreign assets (NFA) increased by only Rs59.189 billion during this period against the fiscal year target of Rs130 billion. But the sources say both the NDA and NFA targets are just indicative in nature.

The net foreign assets of the banking system are defined as the difference between foreign assets and foreign liabilities of the banking system. And the net domestic assets of the banking system are defined as the difference between domestic liquidity and net foreign assets of the banking system. The sources say the fact that M2 growth in the first five months of this fiscal year has been rooted primarily in higher NDA signals a change for the better.

“Because this means (and in fact it has happened) that the banks are lending more money,” said a source close to the SBP.

Banks made Rs124.2 billion net credit to the private sector in the first five months of this fiscal year against the full year target of Rs85 billion. But this much growth in the private sector credit — and an overall rise in M2 growth has pushed up consumer inflation to 2.62 per cent in the five months to November 2003. The full year target is four per cent.

The sources say the SBP high-ups are quite alarmed by rising inflation and that it may compel them to review the SBP’s loose monetary policy stance unchanged since November last year.

The SBP will issue its monetary policy statement for the second half of this fiscal year early next month.